The Electric Car Isn’t Disruptive Innovation

Disruptive Innovation

In his 1997 book The Innovator’s Dilemma about how new technologies cause seemingly well-managed companies to fail, author Clayton Christiansen coined a soon-to-become a ubiquitous term: “disruptive innovation.” This catchphrase seems to have gotten a new life over recent years. I frequently participate in client strategy sessions and attend conference presentations where the speaker does not miss an opportunity to frame a new product or service idea as “disruptive.”

Now, disruptive innovation does not mean “cool” or “better than the competition”; it does not even necessity mean “new.” The term, as Christiansen uses it, means a technology that challenges the business status quo by enabling a new and different product or business model that disrupts and shatters the hegemony of market leaders.

Tesla and Disruptive Innovation

Electric vehicle (EV) technology continues to be a hot topic and, in the mind of many, is, indeed, a disruptive technology. But considered carefully, EVs “just” use a new propulsion technology for a traditional means of transportation. In fact, it’s not even new: electric automobiles were available at the end of the 19th century, before losing the market to internal combustion engines because—this will sound familiar—the quest for an extended travel range.

Electric vehicles from Chevrolet, Nissan and Tesla offer a direct replacement for conventional internal combustion cars. As Clayton Christiansen wrote in a BusinessWeek article:

The electric car is not in any way disruptive. I don’t think Tesla itself thinks this way, but there are a lot of investors who do. It’s what I call a “sustaining innovation”; it makes a good product better. It’s up against the very high-end cars made by BMW and other sports cars.

Interestingly, if you take the long view of the history of the disk drive industry, which Christiansen’s uses so eloquently to substantiate his disruptive innovation model, it’s hardly disruptive at all. The industry leadership went to companies (indeed, often new entrants) that excelled in incremental improvements in hard drive technology: reducing disk form factor from 8 inches to 5.25 inches and eventually to 3.5 inches, higher quality, and lower price. Essentially, these were recording technology and manufacturing process improvements rather than a new and disruptive technology.

Of course, there is a point in which an incremental change offers an order of magnitude improvement in price, availability, and supply chain efficiency that it does become a disruptor. Christiansen’s book is full of such examples. But Tesla cars are not in that category.

On the other hand, Tesla is challenging and attempting to disrupt the status quo in a different segment of the automotive industry: the omnipotent franchise dealership model. Tesla is contesting the traditional way in which consumers buy and service cars and, consequently, the legislation that protects that business model. If successful, this disruption will cause a significant change across the industry and could lead to greater customer satisfaction, improved profit margins, and boost Tesla’s brand image.

On the Merit of Being a Fast Follower

Disruptive innovation helps create a new market and value network, and eventually disrupts an existing way of doing business. However, being “disruptive” isn’t a prerequisite for success, nor is it a guarantee of one.

Study after study shows that about half of those who tried to establish a “first mover advantage” by bringing something new and potentially disruptive in their markets failed to succeed in the long term. And those that do survive are forced to settle for a lower market share than those that follow.

In certain industries, being a “fast follower”—entering the market early but not first—has certain advantages. In the automotive industry, Tesla, thus far the only successful non-traditional automaker, is investing heavily not only in battery technology and charging infrastructure, but also educating and maturing the consumer market. These certainly help drive up sales of lower cost competitors Chevy Volt and Nissan Leaf.

This, of course, does not apply in all industries. For example, in life sciences, being first to market and owning the patents for new drugs is crucial, a strategy that comes at significant costs and risks that only a few industries can put up with. But even in that industry, a fast follower like Teva Pharmaceutical Industries has built $20B business on a broad portfolio of over 850 generic drugs.

Lessons Learned

Attempting to disrupt the market require thorough understanding of not only the technology (which startups typically have), but also the business model and ecosystem, customer maturity level and market willingness to change.

Market resistance to change will stem disruption faster than you think.

Market leaders with deep pockets and strong supply chain don’t disappear as easily as you might infer from The Innovator’s Dilemma. This is particularly true in highly engineered products where the cadence of innovation and getting new products to markets is slow and expensive (again, think automotive).

Being first to market and staying there long enough require deep pockets and much patience. Hype helps, too.